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Real Estate in 2016

by Alan Noblitt on October 28, 2011 · 16 comments

  

Real estate investors, like mortgage note buyers, need to have a clear understanding of not only their own investments but also of the broader real estate and economic world.  Your decision on whether to put up your own money would vary widely based on differing assumptions of property values declining 20% over the next five years, versus those values climbing by 20% over the same time period.  As a mortgage buyer, I’d like to know what interest rates will be over the next few years so that I calculate my rate of return appropriately and with the right risk parameters.

Of course, there is no way to know trends in advance, so we can only make educated guesses and try to cover our downside risk.  Even the smartest economists and market analysts have been wrong more often than right over the last five years, so it is perilous to make forecasts over any lengthy period of time.  I’ll give it a shot here anyway, and maybe someone will come back to me in 2016 to tell me how right or wrong that I was.

Predictions

My line of thinking is that it took a lot of years to get ourselves into this mess so it will take a long time to get out of it.  No matter who wins the election next November, we will still be scrambling to get out of the current economic wilderness at the end of their first term in November 2016.  The country’s total debts will be worse than today, with the politicians still dickering and perhaps putting in place weak deficit reduction plans.  Interest rates will be much higher than they currently are as U.S. and European country debts stay out of control and thus pose more risks.  Unemployment will come down slightly, but still remain at 7.5% or higher.  Rioting across the U.S. will increase dramatically from the current “Occupy” protests as the population grows increasingly frustrated.

What will this mean for real estate?  Well, not much to smile about.  High unemployment and high interest rates will mean less demand for housing, so lower property values.  State and federal governments will pass laws to make foreclosures more lengthy and expensive, which will make investors and banks alike more picky about what they will buy.  In general, politicians will feel like they need to bend over backwards to appear consumer-friendly, making an already challenging environment even more treacherous for investors and for business.  All in all, the real estate market will be seen by the general public as difficult and a poor place to invest.  For savvy investors, there will be plenty of opportunities to make big money as long as they have their eyes wide open to the risks.

On a positive note, the short term outlook for real estate and the stock market should be more stable, as the administration “shines the apple” prior to the next election.  After that, reality will strike hard.

I certainly cannot guarantee the accuracy of my opinions, but am letting them guide me through the current environment.  Over the past five years, I have been right much more than the “experts”, as I am not political, not beholden to any organization, and cannot be bribed.  Whether you agree or disagree with my forecasts above, your comments are welcome.

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{ 15 comments… read them below or add one }

Bilgefisher October 28, 2011 at 9:55 am

Alan,
First, I would respectfully request you change the image for this post. I find showing a soiled American flag to make a point extremely offensive. I would venture to guess many other veterans such as myself would agree.

Now to the point of your post.
Certainly things will go very bad for awhile. I guess I see the silver lining. I think all the BS we have dealt with has finally opened the eyes of many many folks. Tea Party and Occupy do have a common thread. I think they both see corruption and they are spitting mad about it. They may disagree on 90% of everything else, but they are forcing some accountability on those that have avoided it for many years. I see the last few years as a good wake up call that is needed about every 80 years.

Also, I have seen a huge entrepreneurial push in the last few years. I wish I could quantify it. I have seen boards, mastermind groups, startups, magazines and meetups seemingly burst at the seems with folks looking to break from the 9-5, 30 year pension, traditional investing lifestyle.

I say we are at a very exciting time. Unfortunately its hard to see how lush and green a forest will become when the forest fire is still blazing.

Jason

Reply

Alan Noblitt October 28, 2011 at 11:19 am

Jason,
Sorry to hear that you were offended by the flag. I debated using it, but thought it appropriate given the general decline in the U.S. Being an Eagle Scout, I have helped on several occasions with the burning of unusable flags, so no disrespect was intended.

Certainly, from the ashes of recession often grow flowers of opportunities and entrepreneurship. These are exciting and interesting times, without a doubt.

Alan

Reply

Bilgefisher October 28, 2011 at 11:32 am

Alan,
No worries. I had no doubt no disrespect was intended. As a fellow Eagle, its one of those items I couldn’t stay silent on.

Jason

Reply

Yuliany October 28, 2011 at 1:05 pm

Hi Alan,
Great article and I must say that even though the picture is rather displeasing, but it is very representative of our country’s current situation. Sad but true.
I’m currently considering to start investing in Real Estate (mainly in residential rental), because interest rates are still low and the prices have declined significantly.
I understand that the interest rates will not stay low for too long, that is why I think right now is a really good time to buy. However, if the housing price will continue to decline, should I wait a little longer?
I guess the choice is between higher price with lower interest rates or lower price with higher interest rates. Which one is better for investor?

Reply

Alan Noblitt October 28, 2011 at 3:11 pm

Yuliany,
Even in this climate, there are still good deals to be found in real estate and which would remain good buys even if the market continues to decline. If you are new to the industry, I’d recommend that you get involved with a local real investment club and learn from people there.

I don’t know where you live, but investments would be safer in less volatile markets like Texas and Colorado. If you will be investing in Florida, Vegas, California, and the like, you will want to be extra careful. Hope that helps.

Alan

Reply

Kevin Stone O'Brien October 29, 2011 at 2:10 am

Alan,
That’s a good take, but I am a bit more optimistic that entrepreneurial disruption will be quicker to succeed and that in turn will reinvigorate old money to become active. Competition is the number one thing that we can foster right now, in general, and in real estate, that will do the most to promote a rebound. I am betting that the accelerating rate of change makes prediction perilous but opportunity abundant. We have chosen a few key directions; we hope we are right.
Best,
Kevin

Reply

Alan Noblitt October 29, 2011 at 6:46 pm

Kevin,

I hope that you are too. As the government gets more involved in every part of our life, that could affect the competitive landscape. Let’s hope that they don’t.

Thanks for your comments.

Alan

Reply

Stephanie October 29, 2011 at 3:09 pm

Prediction comes from mastery, and it’s really hard to master anything in the real estate business especially with today’s economy. Good point you made above Alan.

M Stephanie

Reply

Alan Noblitt October 29, 2011 at 6:47 pm

Stephanie,

Thank you for your comments. The market is hard enough to predict by itself, and having the government involved is only making it worse.

Alan

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Bill Carter October 30, 2011 at 5:45 pm

Alan, I am CCIM and have been in this business for over 30 years. In my entire real estate investment career, I have never seen the opportunites I see in the market place today!. I see buys out there with some very, very attractive double digit cap rates. Turn around and value added opportunities abound! Interest rates are at an all time low ( owner financing) The normal flow of investment real estate sales and buys have been interrupted by this financial mess we are in. Sellers of good investment property are being forced to long term finance their property if the want to move it. I know a lot of investors in this market who are making buys none of us would have thought possible just a few years ago. If one is smart, knows their market and knows it well…..a world of riches is sitting there to be discovered and bought. Residentual rental demand is going thru the roof and is expected to continue for the remainder of this decade. Baron Rothschild when asked how he amassed his great fortune said,” Buy when the blood is running in the streets, Sell when they are beating your door down.” The blood is running in the street and a fortune is awaiting those that take advantage of these turbulent times.

Reply

Alan Noblitt
Alan Noblitt October 30, 2011 at 6:52 pm

Bill,
Good job in making this economy work for you. As I pointed out, there are certainly opportunities for savvy investors.

In my view, this downturn is less temporary than most people think. I hope that I’m wrong, but the fundamentals are too messed up to come out of this quickly. We are closer to a Japan-style recession than to the typical recessions of years past in the U.S.

Only time will tell.

Alan

Reply

shane haffey November 2, 2011 at 11:22 am

This is a hot potato fix and flip market and will be that way in my opinion for many years to come for reasons stated in the article and others. Savvy flippers stand to make tidy profits although I don’t see anyone getting particularly wealthy. Buy and hold right now may be a good strategy to take advantage of these rates however, that only holds true if the economy doesn’t move into hyperinflation (a strong possibility) which would almost certainly send rents in a downward spiral as history has shown housing percentage to income falls like a ton of bricks.

Reply

Alan Noblitt November 2, 2011 at 4:15 pm

Shane,
I think that you nailed it. We all know that inflation and higher interest rates are coming, but nobody knows when or how hard that they will hit. Most likely, nothing terrible will happen before the next election, so there are short term gains to be made.

Alan

Reply

Kevin November 3, 2011 at 9:32 am

Alan,
That’s a good take, but I am a bit more optimistic that entrepreneurial disruption will be quicker to succeed and that in turn will reinvigorate old money to become active. Competition is the number one thing that we can foster right now, in general, and in real estate, that will do the most to promote a rebound. I am betting that the accelerating rate of change makes prediction perilous but opportunity abundant. We have chosen a few key directions; we hope we are right.
Best,
Kevin

Reply

Alan Noblitt
Alan Noblitt November 3, 2011 at 10:21 am

Kevni,
I hope that you are too.
Alan

Reply

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